Country Rating1
Rating: C
Business Climate Rating1
Rating: D
Risk Assessment2
Growth to increase in 2014, subject to social and political harmony
Growth is expected to accelerate in 2014, driven by the recovery in the United States, the country’s biggest trading partner. External demand will be stronger and domestic demand, linked in particular to investment in infrastructure projects, will remain buoyant. The Pnom Penh and Siem Reap (near Angkor) airport expansion project will help sustain the construction sector, as well as energy infrastructure projects. Investment will also be boosted by the rapid growth of credit. The textile sector (representing 75% of exports) will remain strong. Activity will however by limited by the lack of infrastructure, particularly in terms of transport and electricity distribution. At the same time the demands for higher wages among textile workers, who launched well supported strikes at the end of 2013 and in January 2014, will continue and could disrupt production. Provided that the country manages to quickly achieve a return to political stability, the economy will continue to feel the benefits of increased tourism, notably from Asian countries, including China.
Weak current and public accounts, reliance on foreign aid
The balance of trade will remain in deficit in 2014, with continuing imports of capital goods, oil and gas. In addition, the growth in tourism, the high level of international aid and inwards transfers from expatriate workers will help to mostly offset the increase in the repatriation of dividends by foreign owned companies, largely in the textile sector. Further, substantial foreign direct investment will fund the current account deficit. FDI has risen since 2011 as a result of government-launched public-private partnerships for energy infrastructures.
The public deficit is likely to continue to decline given the strong growth and the reduction in expenditure, and this despite the increase in social expenditure (namely the increase in the minimum wage), as well as spending associated with the increase in the budget for the armed forces. Welfare spending will remain significant in order to continue efforts to combat poverty. Against this background, public finances will remain highly dependent on foreign aid (3% of GDP).
Meanwhile, the banking sector remains weak due to lack of supervision. At the same time, private sector credit in the country expanded by around 30% a year between 2010 and 2013, in a context of declining bank margins, in a highly competitive situation. Moreover, the economy as a whole is highly dollarized and foreign currency deposits account for almost all deposits. The banks are therefore highly exposed to foreign exchange risks.
Risk of political instability and social unrest
The political scene has long been dominated by the Cambodian People’s Party (CPP) led by the Prime Minister, Hun Sen. However, in the July 2013 legislative elections, the party won a greatly reduced number of seats. The Cambodia National Rescue Party (CNRP), the opposition party headed by Sam Rainsy, returned from exile, is refusing to take its seats in the Parliament. It is feeling the benefits of disaffection with Hun Sen, in power for 28 years and significant social tensions, arising from illegal expropriations, as well as working conditions in the textile sector, leading to large-scale demonstrations since the elections. These were aggressively policed by the authorities, resulting in the death of 5 people in January, as well as many arrests. The demonstrations will continue in 2014, and there could easily be further eruptions of violence.
In terms of external relations, the level of repression against the demonstrators, together with the political instability, could lead to the United States and the European Union imposing sanctions. Moreover, relations between Cambodia and Thailand should ease as the International Court of Justice awarded sovereignty over most of the land around the temple of Vihear to Cambodia.
Finally, the business environment remains marked by lack of transparency, considerable legal uncertainty and high levels of corruption.
Strengths
Flexible textile industry and tourism sector with strong potential
Potential offshore hydrocarbon reserves (oil and gas)
Country benefiting from financial support of bilateral and multilateral donors
Regional integration (ASEAN)
Weaknesses
Considerable share of agriculture in GDP; vulnerable to climatic vagaries
Underdeveloped electricity industry
Lack of skilled labor
Dependent on concessional finance due to weak fiscal revenues
Significant governance shortcomings
High poverty levels